LM Extras Aug 25, 2020

Law Firms Up Their Game at Lease Renewal Time

The attorney-landlord relationship may never be the same.

Attorneys everywhere are dusting off their leases and sharpening their cost-cutting pencils, thanks to an elevated capacity for remote operations and an economic downturn that’s trimming revenues in many sectors. A smaller plant is needed, goes the reasoning — especially if its purpose is to facilitate occasional collaborations rather than to shelter desk-bound lawyers and secretaries.

Phillip M. Perry

“Law firms are trying to figure out who can work from home and who can come into the office,” says Ruth Colp-Haber, President and Chief Executive Officer (CEO) of Wharton Property Advisors, a real estate consultancy in New York City. “They are also determining if their current offices fit in with new social distancing guidelines, and what they will need in the future.”

Colp-Haber has helped dozens of law firms find commercial space in her three-decade career. She finds that the economic downturn is changing how attorneys go into negotiations. “Law firms are not immune to the recession — which I would actually call a depression,” she says. “When the economy goes bad, firms look to cut their expenses. Negotiating a better lease is one of the most obvious ways to reduce one of the biggest expenses for any firm.”

The first item commonly up for discussion? Length of tenancy. “It used to be that law firms would take 5- to 10-year leases,” says Colp-Haber. “Today they are seeking shorter and more flexible terms with the right to cancel. Some are even going on monthly arrangements. And landlords, for their part, have become more flexible.”

Colp-Haber also believes more firms will seek rate flexibility, even pegging rents to a formula such as the average in a market basket of comparable buildings. Another likely negotiating point is the ability to reset rates in tune with the changing market. “Every six months the rent could be evaluated based on some type of fair market calculation,” says Colp-Haber. “In my opinion, this is going to be a trend.”

“Historically, when law firms wanted to establish themselves in a new city, they’d literally have to go find a number of lawyers and then find them space. Now they can recruit lawyers in any jurisdiction, in any city and just support them remotely.”

The harsh experience of COVID-19 will also stimulate greater interest in pandemic protections. “Law firms have the expertise to assess risks and are obviously in the vanguard of negotiating the various force majeure clauses in their leases,” says Colp-Haber. “They already get protections in the event of terrorist attacks, floods or other events that keep them from utilizing their offices. I think they will also be fighting for protections against pandemics.”

Not every trendy lease experiment will suit the legal industry. At least one formula gaining traction in other commercial segments — the pegging of rents to transparent metrics such as gross revenues or income — might not be easily adaptable to law firms. “So far this has not been done in the legal field, and I think it would be a very hard metric for law firms to abide by,” says Colp-Haber. “Billings would be difficult to monitor, partly because they can be very variable. A firm might get paid for a large case one month, for example, and then nothing comes in for six months.”

So law firms don’t need as large a footprint as they once did — but how much do they need? The jury’s still out. Much will depend on the nature of the legal industry’s new operational dynamics. “It’s hard to predict what workspace design is going to look like in the future,” says Eric Wangler, President of the North America Division of BigHand, a London-based legal technology company. “But it will be different from the typical pattern of lawyers with their private offices and everybody else in an open floor environment. Now they’re going to need to rethink distancing and how they’re going to work together.”

If a mobile workforce poses a challenge in terms of efficient communications and productive workflow, scaling up remote operations via the internet may also offer opportunities for more productive lawyer-client interactions and help open new markets. “Historically, when law firms wanted to establish themselves in a new city, they’d literally have to go find a number of lawyers and then find them space,” says Wangler. “Now they can recruit lawyers in any jurisdiction, in any city and just support them remotely.”

A noteworthy example, says Wangler, is the recent announcement of an all-virtual practice group by Chicago-based Husch Blackwell. “The group’s lawyers and support people will be 100% remote,” says Wangler. “They’re very excited about it. I think, again, this may be a trend in the future.”

One more benefit of the virtual law firm, says Wangler: A more attractive work environment for people who don’t necessarily want to report to the shop five days a week. That’s a characteristic common to an important recruitment group: younger people filling positions vacated by retirees.